The theme of the ECB’s Annual Conference, opened yesterday, will come as no surprise to regular readers: the importance of communications and expectations.
The financial markets move constantly based not just on concrete data, but also forecasts and predictions. However, as the ECB’s Luis de Guindos highlighted, it’s a double-edged sword: a central bank sends signals on future policy, and the markets react according. The reactions then send signals to the central bank, who, in return, reacts accordingly.
Before long, the two have formed an ‘echo chamber’ whereby the central bank, in influencing market expectations, inadvertently influences the signals it uses itself for policy-making. As the BIS once said, ‘the louder the central bank talks, the more likely it is to hear its own echo.’
As Guindos warned his audience, in such a situation, we can only take ‘expectations priced in financial markets with a pinch of salt.’
It’s what we’ve been saying for years: no-one can truly predict what’s going to happen, or sometimes even get a clear picture of what is happening.
The only way you can really get certainty is by locking in your exchange rate with a forward contract. That way, no matter what happens on the live markets, how much you pay won’t change. Do speak to your Personal Trader on 020 7898 0541 to find out more.
